US Economic Data and Next Week's FOMC Meeting

Next Wednesday's FOMC Statement is likely to be a non-event, not much different in language from the December Statement in describing the economy and keeping future policy on a gradual path of tightening.  The latest data are in line with the Fed's expectation of moderate growth and below-target inflation, but these data still show the economy growing at a slightly above-trend pace.  Next week's key data -- January Mfg ISM and Employment Report -- risk being on the strong side, but not likely by enough to significantly raise the risk of a March Fed rate hike -- as they could be boosted by one-off factors and since February data will be released before the March FOMC Meeting. 

The 1.9% Q416 Real GDP advance report shows the expected unwinding of the jump in Q316 exports.  The unwinding subtracted 0.6% pt from Q416 Real GDP Growth, after adding 1.2% pt in Q316.  Taking account of the 3.5% Q316 Real GDP Growth, Real GDP expanded 2.7% (saar) over H216.  The NY Fed model's early projection of Q117 Real GDP Growth is also 2.7% (q/q, saar).  This pace is above the 1.5-1.7% trend rate, so the risk is that the Unemployment Rate will fall in Q117, just as it did over H216.  The pace is also above the 1.9-2.3% Fed's Central Tendency projection for 2017, so a March hike cannot be ruled out.  But, the Fed may want to see if there is offsetting slower growth in Q217 as a result of a post-winter payback, before it acts.

January Payrolls risk being boosted by a couple of one-off factors.  The unseasonably warm weather could lift jobs, particularly in the construction sector.  Also, fewer-than-normal post-holiday layoffs, after there was only modest holiday-related hiring in Q416, could boost retail sector jobs.  It is not clear whether Trump's hiring freeze of Federal workers will show up in this report.  I can see an above-consensus +175k m/m Payrolls and 0.1% pt decline in the Unemployment Rate to 4.6%.   Consensus is +162ks Payrolls and a steady 4.7% Unemployment Rate.  Calendar considerations point to a consensus +0.2% m/m for Average Hourly Earnings, which would lower the y/y to 2.6% from 2.9% in December.  Note that the Payroll data will reflect re-benchmarking and new seasonal factors, but the BLS already has released an estimate of the new benchmark that shows a small downward impact on m/m Payroll growth.

The January Mfg ISM also could be helped by the warm winter and should remain strong, close to the 54.7 level in December, even though a slight decline cannot be ruled out.  While most other surveys have showed an increase this month, a couple of components of the Mfg ISM -- New Orders and Production -- were very high in December and could come off a bit.  This report also will reflect new seasonal factors.